Merger policy best for Zurich

THE disaster that has overtaken Zurich Financial will do nothing to restore confidence in the insurance industry. This is a business which has always been grouped among the world's strongest firms, albeit never quite at the top of the table, but now it gives new meaning to the term casualty insurance.

For it to lose more than $2bn (£1.3bn) and to be forced to announce a rescue plan which involves raising $5bn from shareholders, cost savings and disposals is the last thing its rivals need to hear when they are working hard to maintain investor confidence in their businesses.

With its shares at a 10-year low, Zurich is clearly in deep trouble but that does not mean every other business is similarly blighted. It is very much a special case. Obviously the curse of the sector-collapsing share prices, have taken their toll and as a major reinsurer a fair slice of the World Trade Centre bill will ultimately end up at its door. But even with such horrors, much of Zurich's weakness remains self-inflicted or, strictly speaking, brought on by the flaws in the strategy of former chairman and chief executive Rolf Huppi.

Zurich gets name recognition in this country as a major sponsor of rugby, but it is much more than that. On top of its big involvement in the wholesale insurance markets it owns Eagle Star, Allied Dunbar, and Threadneedle Asset Management, all of which were sold to it by BAT in what was clearly a brilliantly-timed deal for the tobacco company.

Yet these were among Huppi's better acquisitions compared with some of the deals he did in America which ultimately sapped the group's energy and robbed it of its growth potential in non-life insurance.

What happens now is a moot point. It is all very well for new boss Jim Schiro to say he will sell assets, but in these markets who has the money and the desire to buy them? It is similarly all well and good for him to say he will raise $2bn from shareholders but they do not want to pay up. His best option is surely a friendly merger, if anyone has the nerve.

Rothschild puzzle

UNLIKE Schroders and Warburgs, Rothschild has never made a decent fist of retail fund management. Some say the failure resulted from the family's refusal to allow the Rothschild name to be used in marketing although it is probably the best-known name in finance. Fearful of the reputational risk, they refused to put themselves in a position where they might be assailed by headlines showing a Rothschild fund at the bottom of a performance table.

Instead, even in its most recent attempt to breathe life into the business under the stewardship of Paul Manduca, the service has marketed itself under the five feathers logo. Cognoscenti know this to be the emblem of the family, symbolising the five Rothschilds who spread across Europe 200 years ago to found the different branches of the bank. But it is a bit obscure for the man in Scunthorpe.

A deeper problem, perhaps, was that the bank never took fund management particularly seriously, being far more enthused by the gentlemanly pursuits of banking, gold auctions and advisory work. As a result, it did not always get the best people, and those it did get were too often second-guessed, terrorised or simply sacked by chairman Sir Evelyn Rothschild for the business to progress in an orderly way.

Be that as it may, Rothschild has put asset management up for sale. But why now? In the past few months Goldman Sachs has tried and failed to get the reserve price for Jupiter so it has been withdrawn from auction and Threadneedle is thought to be a likely disposal by the cash-strapped Zurich Financial group. Both are much more attractive businesses than the Rothschild asset management arm and the bank risks getting a large splash of egg across its face if it insists on pressing ahead.

Acting in haste is not the way one expects this family to behave. It reminds me, too, that the results of Rothschild Continuation, the nearest the family ever comes to lifting the financial veil, are several weeks later this year than last. Perhaps that is the clue. Maybe in this tough bear market, the Rothschilds are suffering as much as the rest of us.

Bubble trouble

ALAN Greenspan, chairman of the US Federal Reserve, was attempting to polish his fading reputation at the central bankers' annual thrash at Jackson Hole, Wyoming, last weekend by saying there was nothing a central banker could do to stop financial bubbles such as the dotcom stock market boom - even if they knew when there was a bubble.

Other central bankers disagreed and in particular Otmar Issing, chief economist of the European Central Bank, publicly questioned Greenspan's view of what a central banker is for. He claimed that even though central banks cannot target asset prices, 'a strategy that monitors closely monetary developments...also contributes to limiting the emergence of unsustainable developments in asset valuations'.

It would be fascinating to know where in this debate we might find our own Sir Edward George, as it is very much to the point in setting British interest rates. Today the monetary policy committee again left our rates unchanged, and with manufacturing in disarray, sterling quite high enough and retail spending beginning to cool, this was the obvious decision.

It does mean, however, that again the committee has sought to ignore the existence of the massive house price bubble. It is, of course, arguable that no acceptable rise in rates will cool that boom, but does that mean the MPC is right not to try? Will we thank it for its forbearance when the bubble bursts?